VSE: Shrink and overlay one video over another
Just insert your FHD Base Video strip in the VSE, then on a channel above insert the SD Overlay strip and mute it (Strip - Mute Strips or just press H).

For preserving the aspect ratio and the original size of your SD Overlay strip you might need to check Image Offset in the Strip Input properties as well as your SD Overlay strip is not the same aspect ratio as your FDH Base Video (and as your project Resolution under Dimensions in a Properties View should be).

With the SD strip selected Add an Effect Strip - Transform with an Alpha Over Blend in the Edit Strip properties. And finally transform its Position and Scale (for preserving your aspect ratio you should check Uniform Scale) under the Effect Strip properties.

Instead of changing the Position in Percent (as per default) you can change the Translation Unit to Pixels in the same Effect Strip poperties if needed.



There is a great Tutorial of that on YouTube from Mikeycal Meyers.